Improving Efficiency

Improving Efficiency
The new high ground

for banks
Produced by the Deloitte Center for Banking Solutions
The new high ground for banks
Foreword
The turmoil in the financial markets, coupled with the economic downturn, is fundamentally altering
the financial services environment. In this new world, improving operating efficiency has become a
competitive necessity. But while financial firms have typically moved quickly to reduce costs when the
business cycle is contracting, far too often these efforts have been quickly forgotten when business
picks back up.
In this report, we present research conducted by the Deloitte Center for Banking Solutions
demonstrating the critical importance of operating efficiency to the fortunes of financial firms. Among the findings is that
building efficient operations is not enough steady, continuous improvement in operating efficiency are required. In fact,
banks that have achieved continuous improvements in efficiency have also generally experienced far greater gains in their
share prices.
The report also describes the key factors that drive success. While there are many factors, a few themes underpin them.
Successful programs are sustained, long-term efforts, not something that is here today and gone tomorrow. These efforts
should be comprehensive, encompassing such issues as awareness, business processes, metrics, technology, and culture.
Finally, most organizations will find that increasing efficiency over the long term will demand fundamental changes to their
business processes and often to their culture as well. Driving this level of change depends upon active leadership from the
C-suite to infuse a commitment to continuous efficiency improvement into the DNA of the organization.
We hope you find this report worthwhile.
Sincerely,
Don Ogilvie
Independent Chairman
Deloitte Center for Banking Solutions
May 2009
As used in this document, Deloitte means Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.
Executive summary
Financial services firms are facing a much tougher

operating environment as a result of the credit crisis.
Higher funding costs, increased defaults, and limited
opportunities for topline growth are all contributing to
a more challenging situation for the industry. Combined
with the likelihood of additional compliance obligations,
financial institutions are facing a level of difficulty they
have not seen for many years. As a result, many firms are
being forced to place more emphasis on reducing costs.
Improving efficiency has long been a challenge for the
financial services industry, but cost management is not
only about reducing expenses. It is about generating more
revenue per unit of cost. U.S. banks vary widely in their
commitment to cost management, and their commitment
tends to be more cyclical than sustaining.
The benefits of a stronger focus on efficiency can
be significant. According to our research, banks that
generally maintained a consistent approach to efficiency
improvement also enjoyed superior stock-price growth
in addition to being better prepared to organically fund
investments. Furthermore, banks that effectively manage
their operating costs will likely have more room to
maneuver during the current credit crisis than banks that
do not. It is not just revenue that counts on Wall Street.
This may be particularly important for banks struggling
to rebuild capital positions damaged by the crisis. In this
environment, any contribution to the bottom line
is important.
With this in mind, many banks have announced costreduction programs to help improve damaged margins.
However, how successful will these programs be?
For banks to exceed their peers in improving

efficiency, they have to be willing to implement
a long-term, enterprise-wide approach that will
require fundamental, and for some, cultural
change.
In down markets, the temptation is often to resort to
short-term measures and reduce costs quickly wherever
possible. But successful cost management requires a
long-term and consistent focus across cycles instead of
reactive responses to specific business cycles, such as the
current downturn.
For banks to exceed their peers in improving efficiency,
they have to be willing to implement a long-term,
enterprise-wide approach that will require fundamental,
and for some, cultural change. They want to go beyond
simply reducing budgets and improving processes, cutting
back on external contractors, and freezing headcount
and expenses. Instead, they try to embed a commitment
to efficiency into the firms DNA, perhaps even making
consistent quality and continuous performance
improvements part of the enterprise identity.
This report addresses the importance of a sustained focus
on cost management, particularly at the present time,
and provides suggestions on ways to start the process of
continuous improvement.
Current trends in banking
The perfect storm

In the current crisis, financial institutions are under
siege. Credit markets are struggling. Transformational
government support is broaching uncharted territory. Wall
Street stalwarts are disappearing entirely or being acquired
by other institutions. Consumer confidence is spiraling to
decades-old lows, with real reductions in both consumer
wealth and spending. (See Exhibit 1.)
The market has changed dramatically from seeking higher
returns through complex, leveraged transactions to
increased focus on simpler, more standardized products
and businesses with lower risks and more predictable
returns. The market for structured products is in retreat,
and there is much greater reliance on fee-based services
such as transaction banking, custody, and clearing
services that depend on scale, processing, and operational
efficiency for their success.
As capital becomes scarce, financial institutions are more

compelled to focus on their core vision and simplify their
businesses. This provides an immediate opportunity for
improving efficiency. Simplifying the organization is one of
the first steps to improving the efficiency and effectiveness
of the infrastructure that supports it.
There are no quick fixes to credit market volatility
First and foremost is the credit crisis; continued writedowns that many banks are facing could potentially impact
the industry for years to come. Banks around the world
have already experienced write-downs of more than
$900 billion.1 Estimates of future potential write-downs
vary as asset write-downs give way to actual credit losses
and plummeting stock prices. (See Exhibit 2.) The crisis
still leaves banks struggling to maintain and restore their
capital positions.
Exhibit 1: A significantly more challenged market
A. Credit Market Crisis

$800 billion1 in write-downs
causes significant capital
impairment and near-term
margin pressure.
The credit crisis is accelerating

industry consolidation.
D. Continuing
Consolidation
Industry Cost Imperative
Return on assets likely to

diminish significantly in a less
leveraged market.
Regulatory scrutiny increases as

government gets increasingly
involved in rescuing banks.
C. Weighty Regulatory
Environment
Source: Deloitte Center for Banking Solutions
B. Difficult Top Line

Environment
Market performance
(indexed
to 100)
Exhibit
2: A significant
decline
in stock price performance
120
100
80
60
40
20
0
01
02
03
04
05
06
07
08
09
10
11
12
01
02
03
04
05
2007
S&P 500 (-38%)
KBW Bank Index(-66%)
06
07
2008
08
09
10
11
12
01
02
03
2009
AMEX Broker Dealer Index(-68%)
Source: Yahoo Finance, Jan 20, 2009
Source: WSJ, KBW, Deloitte Center for banking Solutions
Revenue and margin growth will likely continue

to slow
Banks in particular are likely to maintain higher capital
ratios in the future. This may result from regulatory
pressure, concerns about counterparty risk, or investor
anxieties. In the short term at least, this means lower levels
of return on equity (ROE) than in prior years. In 2008, the
industrys annual net income was the lowest since 1990.2
Additionally, core businesses are likely to continue to face
difficulties from declining consumer confidence. Writedowns create significant pressure to improve earnings,
and rising credit costs are forcing many banks to revisit
the economics of their traditional businesses. The
mortgage origination engine has been seriously wounded,
higher reserves and losses may offset any up-tick in
refinances as rates drop, and pricing pressure from
product commoditization will continue to drive down
margins overall.
Exhibit 3 illustrates a slower outlook for U.S. and European

banking revenue growth through 2009. And, it is predicted
that growth in developing markets, such as those in the
Asia-Pacific region, is likely to decelerate from pressures
on developed economies impacted by the crisis. In the
third quarter of 2008, net income for all Federal Deposit
Insurance Corporation-insured institutions totaled $1.7
billion, a decline of $27 billion from the same period in
2007.3 Quarterly return on assets was down to 0.77%, the
lowest since the second quarter of 1987.4 Write-downs
and credit costs will probably continue to depress earnings
well into 2009.
Exhibit 3: Banking industry revenues past performance and outlook

250%
200%
150%
100%
50%
0%
2000
2001
U.S.
Europe
2002
2003
2004
2005
2006
2007
2008E
2009E
Asia-Pacific
Source: Capital IQ December 2008

Source: Capital IQ December 2008
Organic growth replaces acquisitions

From an M&A perspective, the industry continues to
consolidate around larger, stronger institutions where
improvements in efficiency are a primary driver. This global
process made all the more likely by the continued
pressures of the credit crisis exposes challenged U.S.
banks to the constant threat of acquisition by more
efficient competitors. Major transactions as well as
business model clean-ups are occurring in spurts as the
market attempts to self-correct. The number of mergers
and acquisitions in the industry has increased in recent
years. (See Exhibit 4.)
Essentially, businesses are likely to become simpler and

more standardized forcing greater attention on cost
management and revenue generation per unit of cost. By
inviting capital infusion on a controlled basis from private
equity and sovereign wealth sources, regulators have
opened up the possibility of further restructuring from
activist shareholders.
However, many institutions may need to shift away from
acquisitions, and increase focus on unlocking the value of
core businesses through improved efficiency.
Exhibit 4: Financial services global M&A activity
6000
1,050,000.0
5000
$ Millions
900,000.0
4000
Number of transactions
1,200,000.0
750,000.0
600,000.0
3000
Japan
450,000.0
2000
300,000.0
Europe
Asia
1000
Americas
150,000.0
Africa and Middle East
Total Deals
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
World-Wide Financial Services M&A Transactions by Target Region, All Transactions

Date Announced 1998 to April 6, 2009
Source: Mergerstat; Deloitte LLP
Compliance costs will probably continue to grow

Past financial crises have often resulted in additional
regulation. The already-considerable compliance burden
on banks will likely increase in an attempt to prevent future
crises. The Basel Committee on Banking Supervision,5 the
Senior Supervisors Group,6 the Institute of International
Finance,7 and the U.S. Treasury8 have all issued reports
calling for changes in risk management practices and the
regulatory process itself. The Federal Reserve has recently
issued new regulations9 on mortgage origination to protect
consumers. The outcome of all these recommendations
is likely to be more regulation rather than less, with
banks themselves under pressure to improve their own
governance processes.
159% between 2002 and 2006.10 The last 12 years have

seen a significant number of new regulations impacting
the financial services industry.
While compliance responsibilities have clearly grown, the
approach to compliance management generally has not,
leaving some institutions with a fragmented approach to
delivering against evolving requirements.11 A succession
of reports and initiatives from different regulatory and
industry bodies has appeared, pointing to the probability
of even greater levels of regulatory scrutiny to come. For
investment banks in particular, this is likely to mean a lower
reliance on leverage to generate earnings, which in turn
must be compensated in some way.
Research from the Deloitte Center for Banking Solutions

on compliance costs at leading U.S. financial firms found
that known compliance costs increased by an average of
Banking in the new millennium:

scale alone is not enough
The current credit crisis is accelerating consolidation in
the U.S. banking industry as troubled institutions are
acquired by remaining players. Between year-end 2007
and the third quarter of 2008, the top five U.S. banks
have increased their share of industry assets from a little
more than a half to nearly two-thirds.12 Larger banking
institutions increasingly dominate the U.S. and global
banking landscape.
Is this a good thing or a bad thing from an efficiency
perspective?
Large, complex financial institutions (LCFIs) can create
diseconomies of scale unless siloed infrastructures and
fragmented technologies are streamlined or replaced.
According to our analysis of recent mergers and
acquisitions, the management of more efficient institutions
typically comes out on top. This trend has been even

more pronounced during the credit crisis. Effective cost
management has become even more critical for the
success of the banking industry in particular and for
financial services in general.
Has industry consolidation improved efficiency?
Exhibit 5 shows efficiency ratios by size of commercial
bank. We see two clear groupings: larger banks have
better efficiency ratios than smaller banks. However,
the larger banks are almost indistinguishable in terms
of efficiency. This suggests that, at some level of scale,
efficiencies become more difficult to achieve. In other
words, above a certain size of bank, there may be
diseconomies of scale.
Exhibit 5: Efficiency ratio trends by size of bank*

75
70
65
60
55
50
45
40
2002
2003
2004
2005
2006
2007
2008
Over $10 billion in assets

$1 billion - $10 billion in assets
$100 million - $1 billion in assets
$100 million - $1 billion in assets
Source: FDIC, Third Quarter 2008
* The standard FDIC definition of the efficiency ratio has been used throughout ,which equals operating expenses divided by the sum of
noninterest income and net interest income.
Over time, we see the gap between the efficiency of

smaller and larger banks increasing. However, none of
the groups show continuous efficiency improvement.
In fact, efficiency ratios have deteriorated for each
group. While scale may contribute to greater efficiency,
it does not by itself appear to lead to more continuous
efficiency improvement.
Exhibit 6: Changes in efficiency ratios U.S. Banks
2000 - 2008
Average efficiency ratios U.S. Banks 2000 - 2008
75.0
70.0
65.0
The importance of a sustained approach

Cost management in U.S. banking suggests cyclical rather
than sustained progress. (See Exhibit 6.) In addition,
there have been wide variations in performance between
banks and the gap between the lowest and highest
efficiency ratios has increased through the credit crisis.
(See efficiency ratio variance between average, minimum,
and maximum in Exhibit 6.) The European banking industry
has a similar history. In the Asia-Pacific region, banks have
made substantial, albeit more temporal, improvements
in efficiency. (See Exhibit 7.) Following a period of heavy
investment in the region, banks began experiencing
economies from their investments and leveraging
established infrastructure.
One of the more obvious opportunities for all banks in the
current environment is an enhanced focus on efficiency.
It may be one of the few margin generators available as
topline challenges continue to increase. But, the crisis will
pass and even this cycle will turn. Given the decline in
bank market capitalization, analyzing the importance of
efficiency improvement to stock price growth should be
conducted before revenue pressures return.
60.0
55.0
50.0
45.0
40.0
35.0
2000
2001
2002
2003
2004
2005
2006
2007
Q308
Source: Capital IQ
Exhibit 7: Changes in average efficiency ratios

European and Asian Banks 2000 - 2008
Efficiency ratios U.S. Banks 2000 - 2008 average,

minimum, and maximum
% 68
200.0
180.0
160.0
140.0
66
Minimum
Maximum
Average
120.0
64
62
Gap
between
most and
least
efficient is
widening
100.0
80.0
60.0
40.0
60
58
56
54
52
20.0
50
2000 2001 2002 2003 2004 2005 2006 2007 Q308

Source: Capital IQ
2000
Europe
2001
2002
2003
2004
2005
2006
2007
2008
Asia
Source: Capital IQ
What does Wall Street think?
We analyzed the change in the efficiency ratios and

stock prices of 30 U.S. banks of varying size and market
capitalization. The banks were split into three equal groups
based on changes in their efficiency ratios from 2000 to
2006. To isolate the impact of the credit crisis, we analyzed
the banks initially from 2000 to 2006 before the crisis
broke and then again from 2000 to 2008 after the crisis
was in full swing.
Group one (Strong Performers) achieved the greatest
improvement in efficiency, an average of 19.26%. Group
two (Average Performers) saw little change in efficiency,
with an average improvement in their efficiency ratios
of 5.09%. Group three (Challenged Performers) saw
marked deterioration in their efficiency ratios, an average
decline of 13.10%. Almost all banks recorded an increase
in revenues during the period. To highlight this more
clearly, growth in revenues and expenses have been
separated for each of the three groups. (See Exhibit 8.)
Banks in group one expanded the gap between income
and expenses up until 2006. Banks in groups two and
three struggled to achieve this. More significantly, banks
in group one grew revenue by 86% between 2002 and
2006. This was 1.6 times greater than banks in group two
and nearly four times greater than banks in group three.

In 2007, growth in revenues was reduced for all groups
because of the credit crisis.
The next stage was to analyze the average performance of
each of the groups in terms of relative stock price growth.
(See Exhibit 8.) Banks in group one clearly outperformed
the other two groups, while banks in group two
comfortably outperformed banks in group three.
Perhaps more striking was the size of the gap in
stock-price performance.
From 2000 to 2006, the share price of banks classified
as Strong Performers grew by 126.7% on average,
compared to an increase of just 21.3% for the Challenged
Performers. The average growth in share price of the
Strong Performers also outpaced that of the Average
Performers by more than two to one. Additionally, banks
classified as Strong Performers achieved average ROA
growth that was approximately twice as high as Average
Performers over the period, while Challenged Performers
saw their ROA actually decline. Banks that improved
efficiency generally achieved better returns for their
shareholders and generated more revenue per unit of costs
and dollar of capital employed.
Exhibit 8: Average growth in revenue and expenses groups 1, 2, and 3 (2002 2007)
140,000.00
70,000.00
250,000.00
60,000.00
120,000.00
200,000.00
50,000.00
100,000.00
150,000.00
80,000.00
60,000.00
40,000.00
30,000.00
100,000.00
20,000.00
40,000.00
50,000.00
20,000.00
0
Group One Revenue

Source: Capital IQ
0
2002 2003 2004 2005 2006 2007
10
10,000.00
Group One Expenses
2002 2003 2004 2005 2006 2007

Group Two Revenue
Group Two Expenses
2002 2003 2004 2005 2006 2007

Group Three Revenue
Group Three Expenses
Exhibit 9: Wall Street rewards U.S. companies that maintain cost efficiency
Analysis of 30 U.S. banks 2000 - 2006 1,2
300.0%
Group One
Group Two
Group Three
Bubble Size =
Market
Capitalization
Stock Price Change
250.0%
200.0%
150.0%
100.0%
50.0%
Efficiency Ratio Improvement
-50.00%
-40.00%
0.0%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
-50.0%
Source: One Source Reuters reconciled to 10ks
-100.0%
1 The group of 30 banks studied were selected on the basis of a random sample of small, medium, and large banks. The banks have been organized on the
basis of efficiency ratio improvement and then organized into equal groups of three.
2 Banks whose bubble are covered: (Group 1, 10.37% improvement in efficiency ratio, 21.6% growth in stock price), (Group two, 3.42% improvement in
efficiency ratio, 11.5% growth in stock price)
Exhibit 9 maps efficiency changes and stock price growth;

the size of a bubble represents market capitalization. This
exhibit reinforces the message that scale alone is not
enough to drive efficiency improvements over time. Smaller
banks are well represented in groups one and three, while
larger institutions form a cluster in group two.
Impact of the Credit Crisis
Write-downs ravaged market capitalizations across all
banks. (See Exhibit 10.) Risk management and efficiency
management are clearly different disciplines. For ease of
analysis, we reduced the number of groups from three
to two. The first group of banks (12 in total) consistently
improved efficiency, some dramatically so. The second
group of banks (14 in total) decreased their efficiency,
except for two where efficiency remained generally static.
Both groups suffered deterioration in stock price consistent
with the significant decline in the market and the sector.
But the second group of banks experienced a loss of
market value more than twice that of the first group.
Those banks with a stronger track record of continuous
efficiency improvement appear to be weathering the
current turmoil better than those that have not.
Exhibit 10: Average stock price and efficiency changes

sample group of banks FYE 2000 third quarter 2008
20
FYE 2000
Q3 2008
10
0
-10
-20
-30
Deteriorating
or Unchanged
Efficiency
Improving
Efficiency
-40
-50
-60
-70
Stock Price Change
Efficiency Ratio Change
11
Factors that drive success
What is it about the banks in group one that made them

more successful?
Commitment to continuous efficiency improvement.
Banks in group one showed a commitment to continuous
efficiency improvement between 2000 to 2006. Some banks
in group one had higher efficiency ratios (implying lower
efficiency) than banks in group two, but greater
Scale was not a primary factor. Group two had the largest
share of LCFIs supporting the point that size can produce
diseconomies of scale beyond a certain size.
Integrate mergers. Group three banks had the most growth
through acquisitions. (See Exhibit 11.) Many group one banks
were also actively engaged in acquisitions, but less so on
average than banks in groups two and three. Group one also
had some active acquirers, but it appears to have absorbed
acquisitions and managed integration, while achieving better
efficiency statistics. In fact, the most efficient banks in group
one were also among the more active acquirers.
Exhibit 11: Total number of acquisitions by group
300
300
200
190
150
100
50
0
Group One
Group Two
Group Three
Source:
Source:
FDICFDIC
Focus on core business. Banks in group one generally

had less diversified and more concentrated businesses than
banks in groups two and three. In particular, a number of
banks in group two represented the amalgamation of larger,
more complex businesses that came together as a result
of industry consolidation. This group may have achieved
improved market presence, but it did not sustain a high
12
Consistently focus on revenue and costs. Banks in group

one consistently managed both revenue and costs. As a
result, they achieved the greatest increase in revenue on
average and the largest reduction in expenses. Group one
banks generally achieved more consistent improvements in
efficiency than banks in the other two groups. Additionally,
having a low efficiency ratio by itself is not enough for
inclusion in group one. The focus must be on improvement
over time.
Drive from the center out. Clear leadership from the
C-suite is essential in implementing the cost management
program with a cultural commitment to efficiency across the
enterprise. Different parts of the business should be engaged
at all levels to deliver a sustained approach over time with
long-term goals in place and a compensation system to
reflect this.
Understand the critical processes. Critical to the success
of the enterprise are the underlying processes, technologies,
and people that support them.
Benchmark against the best. Benchmarking against
both internal and peer group best-in-class performance is
essential for ongoing success. Internal benchmarking can
force a process of identifying, rewarding, and replicating
best practices already in place within the organization. Peer
group comparisons can also help organizations set higher
standards and evaluate performance against those standards
over time, based on the factors that are shaping the future
of the industry.
250
250
level of efficiency ratio improvements. Group two had the

largest institutions with the most diversified business models.
Managing efficiency improvements across multiple lines of
business provides additional challenges.
The temptation is often to believe that your bank is unique

and cannot be compared with any other. This temptation
should be resisted because it encourages a rear-view mirror
approach to measuring performance.
Maintain a cultural commitment to continuous
improvement. Leaders have made this part of a wider effort
to improve quality in all aspects of the enterprise. It becomes
a key part of the way the corporation manages and talent
development. It goes beyond disciplines like Six Sigma and
is often embedded in the brand of the enterprise, and in
commitments made to customers and stockholders.
Exhibit 12: An efficient maturity model

Continuous efficiency
improvement
Near-term cost cutting
Sustained cost management
Awareness
Short-term approach.
Headcount, travel, and
entertainment expenses focus.
Limited understanding of the
detailed costs of running the
business.
Prioritized cost management

opportunities.
Detailed understanding of costs
down to individual product and
service levels.
Strong C-suite leadership.

Efficiency part of the DNA of the
enterprise.
Close leadership alignment at the
enterprise and line of business level.
Constantly seeking new methods of
improvement.
Accountability/
Organization
Roles and responsibilities not

clearly defined.
Limited structural oversight
or alignment between line of
business and C-suite.
Commitment varies by line of
business.
Roles and responsibilities clearly

defined.
An enterprise-wide approach.
Accountability well established.
Defined incentives and penalties
in place and enforced.
Long-term goals drive the
efficiency agenda.
Close alignment between
business and operations.
Efficiency goals are top of mind at

all levels of the enterprise.
Close integration with broader
organizational goals shareholder
value, performance improvement,
and longer-term customer
relationship development.
Process and
Controls
Limited focus on process

improvement and
organizational simplicity.
Many silos and fragmented
structures.
Heavy focus on manual
exceptions.
High focus on process

improvement consistent with
core vision and priorities.
Enterprise-wide approach
leveraging shared resources
and utilities within a business
function model.
Process and goals are constantly

reassessed to find new and better
ways of accomplishing more with
less.
Innovation is a critical part of the
process management agenda.
The firm is seen as an industry
leader in driving infrastructural
improvements.
Measurement
Metrics in place to measure

efficiency are limited or
inconsistent across the
enterprise.
No external benchmarking.
Metrics in place to manage

efficiency improvements.
External benchmarking with
best-in-class industry peers.
Metrics are in place and constantly

reassessed for effectiveness.
External benchmarking in place
with best-in-class efficiency leaders
outside the industry.
Technology
Fragmented, siloed, aged

technology infrastructure.
Limited alignment with the
business.
High maintenance costs.
Low technology return on
investment.
Strong alignment between

business and technology.
Well-integrated systems-high
degree of automation.
High technology return on
investment.
Clearly established technology

leadership.
High degree of automation.
Leaders in proven and innovative
technology.
Mastery in managing a technology
portfolio.
Culture
No clearly established cost

management culture.
Revenue goals consistently
outweigh cost management
considerations.
Cyclical approach to cost
management.
Strong internal commitment to

Embedded cultural focus.
Quality is part of the external

branding image of the firm.
The firm defines itself by its
culture of efficiency with clients,
shareholders, and employees
beyond traditional benchmarks.

13
An enterprise-wide perspective
Where is your firm today?

We believe that most financial institutions will find
themselves in one of the three channels in terms of their
approach to cost management. (See Exhibit 12.)
a leading role in the development, for example, of clearing

and settlement systems and infrastructural projects or risk
initiatives that increase efficiency across the financial services
industry for the benefit of all institutions.
Short-term cost management: This typically reflects a

transactional approach to cost management, focusing on
low-hanging fruit and demand-based activities rather than
sustainable organizational restructuring and streamlining
processes and infrastructure. Cutting travel and
entertainment, reducing headcount, and cutting projects
is often the first response of institutions in this channel.
Cost-cutting goals are short term in nature. There is often
significant push back within individual lines of business,
and as a result, cost-cutting goals may not be achieved.
Cost-cutting initiatives are often put in place as a response
to cyclical pressures, and those pressures change once the
cycle has turned. This approach characterizes the cyclical
nature of many cost-cutting programs.
An enterprise invested in continuous efficiency improvement

may not define itself primarily in efficiency terms, but
it may express the same commitment through broader
objectives, such as perfection in meeting customer needs
or maximizing shareholder value. Efficiency intelligence
goes beyond initiatives like Total Quality Management (TQM)
and Six Sigma and is reflected in a cultural approach to
management that constantly tries to improve performance
across the enterprise at all levels and functions. Developing
this level of efficiency leadership can take several years,
involving a total commitment on the part of senior leadership
as well as sweeping cultural change.
Sustained cost management: Sustained costmanagement strategies span industry cycles and attempt
to make efficiencies permanent. Goals are aligned to
the core vision of the enterprise. Efficiency improvement
is consciously embedded in the DNA of the institution
through an explicit shift toward creating a culture that
recognizes and rewards a rigorous approach to cost
management and performance improvement.
The key element in sustained cost management strategies
is a long-term commitment to efficiency improvement. In
our experience, longer-term cost management programs
are more successful than short-term initiatives. They tend
to have wider internal support and are frequently more
strategic in their scope and intent. With their focus on core
operating model improvements, longer-term programs
typically address the key challenges of the enterprise in a
more sustainable fashion.
Continuous efficiency improvements: This approach
goes beyond long-term cost management and
differentiates the firm in efficiency improvement. This
translates into dealings with customers, in communications
with shareholders and in managing and developing
employees. A commitment to efficiency leadership is also
often reflected in initiatives at an industry level, playing
14
An efficiency maturity chart

Exhibit 12 lays out an efficiency maturity chart designed
to help institutions determine roughly how they might
compare with a best-in-class model. This is no substitute
for an ongoing benchmarking approach, but it should help
an institution establish some preliminary goals for what it
might define as a realistic goal based on an approximation
of where it is today. Moving from one part of the chart to
another can take several years of continuous effort and may
ultimately involve all parts of the institution.
Mapping the marketplace
A new financial services marketplace is emerging from the
credit crisis. Its focus is very different from before. Market
conditions are much tougher, and continuous margin
improvement is more difficult to accomplish. In this context,
consistent focus on improving operating efficiency for all
business segments is more important than ever. Especially
in businesses that are heavily invested in scale and scope,
efficiency improvement is the ultimate battleground for
competitive success and stockholder enrichment. The current
phase of the market, which grants a premium to businesses
with more transparent and predictable profit characteristics,
only serves to emphasize this.
Authors
David Cox
Director of Research
dcox@deloitte.com
+1 212 436 5805
Paul Legere
Principal
Financial Services
Deloitte Consulting LLP
plegere@deloitte.com
+1 312 486 2289
James Sohigian
Principal
Deloitte Consulting LLP
jsohigian@deloitte.com
+1 312 486 2683
Industry Leadership
About the Center
Jim Reichbach
Vice Chairman
U.S. Financial Services
Deloitte LLP
jreichbach@deloitte.com
+1 212 436 5730
The Deloitte Center for Banking Solutions provides insight and strategies to solve
complex issues that affect the competitiveness of banks operating in the United
States. These issues are often not resolved in day-to-day commercial transactions.
They require multidimensional solutions from a combination of business disciplines
to provide actionable strategies that will dramatically alter business performance. The
Center focuses on three core themes: public policy, operational excellence,
and growth.

Don Ogilvie
Independent Chairman
dogilvie@deloitte.com
To learn more about the Deloitte Center for Banking Solutions, its projects and events,
please visit www.deloitte.com/us/bankingsolutions. To receive publications produced
by the Center, click on Complimentary Subscriptions.
Laura Breslaw
Executive Director
Two World Financial Center
New York, NY 10281
lbreslaw@deloitte.com
+1 212 436 5024
Endnotes
Bloomberg WDCI Report 2/25/09.
Ibid.
Ibid.
FDIC Quarterly Banking Profile Q4 2008.
4
5
6
Bank for International Settlements Web site, April 16,2008, www.bis.org/press/p080416.htm.
Observations on Risk Management Practices During the Recent Market Turbulence, The Senior Supervisors Group, March 6, 2008.
Final Report on the IIF Committee on Market Best Practices, IFF, July 17, 2008.
Blueprint for a Modernized Financial Regulatory Structure, U.S. Treasury, March 31, 2008.
Amendments to Regulation Z, Federal Reserve, July 14, 2008.
10
Navigating the Compliance Labyrinth The Challenge for Banks, Deloitte Center for Banking Solutions, December 2007.
11
FSI deal activity includes banking and finance institutions as defined by Mergerstat. 2008 estimates of M&A Deal activity includes closed or pending deals in the Mergerstat database as
of Apr 27 2008.
12
Cross-border M&A deal activities includes deals where the accquirer and the target are based in different countries Cross-border is inclusive of cross-region activity.
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Improving Efficiency

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Improving Efficiency

The new high ground

Produced by the Deloitte Center for Banking Solutions

Financial services firms are facing a much tougher

For banks to exceed their peers in improving

Deloitte Center for Banking Solutions

Current trends in banking

The perfect storm

As capital becomes scarce, financial institutions are more

Exhibit 1: A significantly more challenged market

A. Credit Market Crisis

The credit crisis is accelerating

Industry Cost Imperative

Return on assets likely to

Regulatory scrutiny increases as

Source: Deloitte Center for Banking Solutions

Source: Deloitte Center for Banking Solutions

Deloitte Center for Banking Solutions

B. Difficult Top Line

S&P 500 (-38%)

KBW Bank Index(-66%)

AMEX Broker Dealer Index(-68%)

Source: Yahoo Finance, Jan 20, 2009

Source: WSJ, KBW, Deloitte Center for banking Solutions

Revenue and margin growth will likely continue

Exhibit 3 illustrates a slower outlook for U.S. and European

Deloitte Center for Banking Solutions

Exhibit 3: Banking industry revenues past performance and outlook

Source: Capital IQ December 2008

Organic growth replaces acquisitions

Deloitte Center for Banking Solutions

Essentially, businesses are likely to become simpler and

Exhibit 4: Financial services global M&A activity

World-Wide Financial Services M&A Transactions by Target Region, All Transactions

Source: Mergerstat; Deloitte LLP

Compliance costs will probably continue to grow

159% between 2002 and 2006.10 The last 12 years have

Research from the Deloitte Center for Banking Solutions

Deloitte Center for Banking Solutions

Banking in the new millennium:

typically comes out on top. This trend has been even

Exhibit 5: Efficiency ratio trends by size of bank*

Over $10 billion in assets

Deloitte Center for Banking Solutions

Over time, we see the gap between the efficiency of

The importance of a sustained approach

Exhibit 7: Changes in average efficiency ratios

Efficiency ratios U.S. Banks 2000 - 2008 average,

2000 2001 2002 2003 2004 2005 2006 2007 Q308

Deloitte Center for Banking Solutions

What does Wall Street think?

We analyzed the change in the efficiency ratios and

and nearly four times greater than banks in group three.

Group One Revenue

Deloitte Center for Banking Solutions

Group One Expenses

2002 2003 2004 2005 2006 2007

Group Two Expenses

2002 2003 2004 2005 2006 2007

Group Three Expenses

Stock Price Change

Source: One Source Reuters reconciled to 10ks

efficiency ratio, 11.5% growth in stock price)

Exhibit 9 maps efficiency changes and stock price growth;

Prioritized cost management

Roles and responsibilities not

Roles and responsibilities clearly

Efficiency goals are top of mind at

Limited focus on process

High focus on process

Process and goals are constantly

Metrics in place to measure

Metrics in place to manage

Metrics are in place and constantly

Fragmented, siloed, aged

Strong alignment between

Clearly established technology

No clearly established cost

Strong internal commitment to

Quality is part of the external